Midterms over, what next?

A flurry of corporate results lifts European indices

As the US midterm election dust settles, at least from voting if not on the political front, stock markets are shifting focus back onto corporate news.

Astra, BAE, Sainsbury move FTSE 

European gauges are moderately higher on results and earnings’ guidances from Siemens, Ericsson and UniCredit. In London, Sainsbury surprised on the positive side with a 20% increase in first half profits, BAE Systems reiterated its flat earnings guidance while Astra Zeneca reported a 37% drop in net profits even though its sales showed a respectable increase. Still, the declining profits didn’t stop the drug maker’s shares from rallying 2% this morning and helping to lift the FTS

Midterms over, what next?

US stock markets all closed handsomely higher late Wednesday as the markets began to chew on the new reality of a split Congress and all that will mean for President Trump who until now had an almost unfettered ability to make political and economic decisions due to the Republican majority in both houses. But even before the dust settled on ballot boxes and as political analysts started looking at the long list of grievances the Democrats have against Trump, including his tax returns and suspicions of involvement with Russia during the presidential election, Trump asked for the resignation of Attorney General Jeff Sessions. The drastic but not unexpected decision could imply that Session’s successor might abandon the Russia-related investigation into the President as the President had been at loggerheads, with Sessions over that issue.

US stocks rallied in the wake of Session’s resignation, adding to the post midterm gains. Longer-term Treasuries also moved higher and the difference between short- and long-term Treasury yields shrank.

Mixed UK economic data

UK economic data showed two diverging trends with house prices falling the most in six years, particularly in the pricey London boroughs and London’s commuter belt. At the same time wages for new employees grew the fastest, largely as Brexit has led to declining staff availability. The data will confirm the BoE’s concerns over wage inflation amid a slowing economy and will set the scene for rate hikes in the coming months, which in turn is likely to dampen the housing market even further.

Sainsbury’s performance reasonably well

A bevy of one-off expenses may have dented the bottom line, but at an underlying level Sainsbury's has performed reasonably well in the first half. Recent market-share losses haven't translated into a fall in margins, with the company's overall retail operating margin up 36 basis points, despite some weakness in general merchandise and banking.

Sainsbury's is continuing to reap efficiency gains from the Argos deal at an impressive clip, offering a glimpse of the cost benefits that could be achieved from its proposed acquisition of Asda. The Asda deal remains a crucial plank in management's plan to combat rising competition from German discount retailers, Amazon's online offering, a resurgent Morrisons and a healthier Tesco. Unfortunately for Sainsbury's, a positive outcome of the competition regulator's probe into the Asda transaction is far from a foregone conclusion. If the regulator's blessing is conditional on hundreds of forced store closures, the impetus for the deal could crumble.

Auto Trader surprised on the upside

Auto Trader has once again surprised on the upside, as the strength of its online product offering helps it navigate a tough auto market. Average revenue per retailer is still growing, despite the number of cars up for sale on its site slipping amid a fall in UK-wide stock.

Such a resilient performance holds Auto Trader in good stead as it prepares for a fresh competitive assault from eBay. Online car retailing can be a lucrative affair, with relatively-low operating costs opening the door to fat margins. Today's results show that competitors like eBay still have some catching up to do if they're to match Auto Trader's success and put a dent in its enviable 68% operating margin.

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